A service tax demand on the Employees State Insurance Corporation may bring the labour ministry and the finance ministry on collision course, less than a year after they locked horns over a similar demand on provident fund payments.

The revenue department has decided that ESIC, which promises health benefits through ones working life, is liable to pay service tax, a move that could increase cost for India Inc to provide mandatory health cover for workers.

Over the last couple of months, field formations of the central board of excise and Customs have been issuing service tax demands to ESICs 600-odd branch offices across the country.

We are not running a for-profit activity that can be taxed as a commercial service, said a senior ESIC official at the corporations headquarters in New Delhi. We are a social security scheme set up under an Act of Parliament, he said, requesting anonymity. He said it would be difficult to put a consolidated number on the tax demand at this stage.

ESIC has an annual income of around Rs 4,500 crore with 5.5 crore beneficiaries under its net. ESIC has alerted the labour ministry about the tax demands and sought a policy-level intervention from the government.

This is the second time in less than a year that the ministries of finance and labour are heading for a showdown over taxability of social security schemes. Last November, a service tax demand was raised on the countrys largest retirement fund -- the Employees Provident Fund Organisation (EPFO).

The demand, originally at around Rs 461 crore, has now been confirmed at over Rs 1,000 crore. While the EPFO is filing an appeal against the demand, it is also creating a contingency plan to shift the tax burden to employers if the demand is upheld.

Employers currently pay 1.1% of EPF contributions as administration charges, which would go up if service tax becomes applicable. The ESIC is also expected to hike administrative costs paid by employers to factor in service tax.

Applicable on workers earning up to Rs 15,000 a month, the state-run insurance scheme is financed by contributions from employers and employees. Employers pay 4.75% of wages and employees chip in 1.75%. The ESIC has a large network of hospitals, whose operational costs are shared by the Centre and the states.

The scheme is applicable to all factories with 10 or more workers and retail trade establishments with 20 workers or more. There scheme covers 1.43 crore families.